December's CPI report brings a mix of news. Headline CPI rose by...
Sam Williamson@SWilliamsonEcon
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Jan 15, 2025
~2 min read
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December's CPI report brings a mix of news. Headline CPI rose by 0.4% (slightly above expectations), driven by gasoline prices, and 2.9% year-over-year (aligning with consensus). Core CPI, which excludes food and energy, increased by 0.2% in December, a welcome slowdown after four months of 0.3% rises, bringing the year-over-year rate to 3.2%.
This downside surprise in Core CPI is encouraging, but the Fed will likely need to see sustained progress before considering additional rate cuts in 2025.
Further details and analysis on specific categories are provided below.
This downside surprise in Core CPI is encouraging, but the Fed will likely need to see sustained progress before considering additional rate cuts in 2025.
Further details and analysis on specific categories are provided below.
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December inflation was driven by a sharp rise in gasoline prices (+4.4% m/m) and temporary increases in new and used vehicles (+1.2% and +0.5% m/m) and airline fares (+3.9% m/m). Vehicle prices likely rose due to short-term replacement demand after hurricanes Helene and Milton, while holiday travel boosted airline fares and gasoline. Encouragingly, excluding these short-term impacts would show even stronger disinflation progress in December.
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#Shelter, one of the stickiest categories keeping inflation elevated above the Fed's 2% #inflation target, also showed continued disinflation progress in December. Shelter inflation rose 0.26% m/m and 4.6% y/y (the lowest level since Jan. 2022) and should provide a steady tailwind in 2025 for the #Fed's ongoing battle against inflation.
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On the #housing side, today's softer core CPI print led to a rally in 10-year #Treasury yields, hinting at potential relief for #mortgage rates, which have surged by a full percentage point since late September. Continued disinflation is essential for lowering mortgage rates, which typically follow 10-year Treasury yields, in the coming months.
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Below headline CPI, today's release brings some optimism as we enter the new year, with no signs of broad-based inflation reacceleration and continued normalization in key areas like shelter. However, one report doesn't make a trend. The Fed will need to see sustained progress before considering rate cuts, and is likely awaiting more policy certainty as the second Trump administration settles in.